Schembri Says Canada’s Macroprudential Housing Policy Works

Bank of Canada Deputy Governor Larry Schembri said regulatory steps to rein in the nation’s housing market seem to be successfully curbing risks to the financial system.

So-called macroprudential policies, such as tightening qualification rules for mortgages, have slowed the rate of growth in household debt, Schembri said in a speech Tuesday in Kingston, Ontario.

“The resulting strength in the housing market has increased household imbalances, but the risks stemming from these vulnerabilities have been well managed by complementary macroprudential policies,” Schembri said.

He took audience questions afterward in a segment that was closed to media.

Canada’s surge in home prices and consumer debt fueled by the lowest mortgage rates in decades has drawn warnings from the International Monetary Fund and the Organization for Economic Cooperation and Development. The Bank of Canada, which has cut interest rates twice this year, has said any imbalances should be handled by regulatory measures rather than monetary policy.

Measures taken over the past few years have been working, said Schembri, citing specifically tougher loan-to-value and debt-to-ratio requirements. Increased capital requirements for banks have also helped.

“While long-term evidence on these instruments is not yet available, permanent measures that address structural regulatory weaknesses and that are relatively straightforward to implement and supervise will likely be the most effective over time,” he said.

The gains in home prices can be explained by rising demand linked to population growth and urbanization, as well as easier credit conditions, Schembri said. The supply of new houses is also restrained by stricter zoning regulations and the physical limits of cities, such as the mountains and water surrounding Vancouver, he said.

His remarks Tuesday didn’t give an outlook for economic growth or any guidance on the central bank’s next interest-rate decision, scheduled for Sept. 9.